PC price cuts drive sales

By Diane Frank

Nov 22, 1998

Over the past several weeks, PC vendors have cut prices on products from notebooks to workstations, making it more affordable for agencies to replace old machines and buy higher-end systems than previously possible.

Following strong third-quarter earnings reports and the falling cost of components, vendors such as Dell Computer Corp., Compaq Computer Corp., Micron Electronics Inc. and Hewlett-Packard Co. are cutting prices of their systems as much as 18 percent.

The latest price cuts come on the heels of steadily falling prices over the course of the spring and summer, as chip manufacturer Intel Corp. produced more powerful processors and drove down prices on older, but still powerful, systems.

Agencies now can buy desktop computers with Intel's new 450 MHz Pentium processor at prices less than $2,000, dual 450 MHz Pentium II-based workstations at just more than $2,000 and 300 MHz Pentium II notebooks close to $3,000— and federal buyers are noticing.

For the National Park Service, the drop in PC prices amounts to what information resources coordinator Don Thie calls "a godsend." Lower prices mean the service should be able to replace thousands of older desktops that are not Year 2000-compliant. In 1997, about 10,000 of the service's nearly 15,000 computers were 486s or slower.

Replacing the park service's PCs would take about 10 years if its PC budget were to remain at last year's level of $3 million, Thie said. The service received no money in this year's budget for replacing PCs, but it expected emergency Year 2000 money from the Office of Management and Budget. That funding, coupled with the lower PC prices, should help the agency purge itself non-Year 2000-compliant machines, he said. "We're ecstatic about getting really good PCs for less than $2,000," he said. "We actually have a shot of getting rid of all those systems before the Year 2000 rolls around."

And there are now plenty of good computers for that price. At the beginning of the month, Micron announced a 450 MHz version of its Millennia desktop with commercial pricing of $1,699. That is almost $1,000 less than the then-top-of-the-line Millennia 400 MHz desktop the company offered in June.

The steady drop in prices has begun to drive more business than contract shops normally see in the first quarter of the fiscal year.

"October will be a good month for us in comparison to the past," said Joanne Woytek, scientific, technical and engineering workgroup manager at NASA's Scientific and Engineering Workstation Procurement II program office. "It's still not the same as in September, but usually it is a much lower month for us." While the program office cannot directly attribute the increased business to lower PC prices, lower prices for better technology usually will have an impact, she said.

"Normally you have a quieter period in government as they distribute new budgets," said Harry B. Heisler, vice president and general manager of Micron Government Systems. But even in a year during which the budgets were late, agencies already are coming to Micron to see what is available. "They may have specified a 350 or 400 MHz [computer] for purchase last year, and now they find they can afford maybe a 400 or 450 MHz.... Many are pleasantly surprised," he said.

With price clauses built into almost every federal purchasing contract, price changes are translated immediately to the federal buyers. "Our federal contract prices are all based off our [General Services Administration] schedule, and those prices are based on our list price, so every time we reduce a price, the federal market indirectly gets the result of that," said Bob McFarland, vice president and general manager of federal sales and marketing at Dell Federal.

Dell's cuts are tied to the company's earnings report, which revealed a 51 percent growth in revenue, McFarland said.

Other companies also are seeing the cost of manufacturing their systems going down. "We're seeing costs drop across a variety of components, such as processors, memory and hard drives," said Dave Dupont, product marketing manager for HP's Kayak workstation group, which today announced price cuts of as much as 12 percent. "The price cuts we're announcing throughout the line reflect those price decreases."

It is a fact of the computer market that prices will be cut on a fairly regular basis, and it is now happening almost twice a quarter, analysts said.

"Price cuts are pretty routine in the PC business," said Roger Kay, desktop analyst at International Data Corp. Falling costs of components enable vendors to drop prices, and "at each lower price point, new buyers come out," he said.

"We usually see a small spike in demand when we have price decreases," McFarland said. "Many of them are new customers who say, 'Wow, there's a price I like.' "